Smorgon Steel Case Study Analysis

Smorgon Steel Case Study Analysis

The many challenges that Smorgon Steel faces are symptomatic of manufacturers globally. First and most urgently there is the need to become more demand-driven and demand sensing with their supply chains including the urgent need to synchronize their production cycles with their other divisions' needs. Second, strategies aimed at working capital reduction need greater coordination and integration points within the it infrastructure to be successful. Third, the use of analytics and intelligence within it is limited and nearly reactionary in its timing and approach. This clearly needs to change for Smorgon to stay competitive not only in its home markets but also globally. Fourth, Smorgons' need to consolidate ERP instances is symptomatic of what many manufacturers are grappling with today. Having grown through acquisition, and then using ERP systems for specific manufacturing tasks and the lack of integration between multiple instances of their ERP systems has made ROI on their entire it investments elusive for Smorgon. As a result, continued major investments in it are met with skepticism, as there is a lack of credibility regarding the results that are being attained. Exacerbating this are the major investments in supply chain planning, execution, optimization and management applications including the expensive Manugistics supply chain suite. it's clear that the operating charter of Smorgon it itself needs to change, it must become a strong contributor to the strategic plans of Smorgon, not just a cost centre. Aligning all of it behind business strategies is critical and that is the intent of this case analysis, to provide insights into how the company can accomplish this transformation. Within this case study strategies for transforming Smorgon's it department into a vital part of their strategic plan and long-term strategies will be provided.

Introduction

Today Smorgon Steel has five different ERP systems installed and as a result the it infrastructure has grown to be disparate and partially integrated. The company uses WebMethods as the Enterprise Application Integration (EAI) layer between these ERP systems and supply chain applications including Manugistics, Mincom, Weighbridge, TagMan (tag management system), SpectroMeter (Quality Testing System) and the data warehouse the company has residing on a Storage Area Network. The wide disparities in each of the these ERP systems leads to only the most common and easiest to produce reports being produced, delivering little value beyond the core transaction and reporting metrics. Simply put there is no alignment of these ERP systems with a common business strategy, making their value to the organization minimized. Compounding this is the lack of integration on sales and operations planning S&OP) data including the inclusion of master data management repositories that could in turn be used for major strategic contribution vs. being annualized costs.

These are the key strategic areas of focus for Smorgon Steel going forward. First, the company is looking for ways to leverage it to accomplish working capital reduction, increase and sustain margin improvements through better pricing and more effective procurement practices, and attain cost reductions through a series of strategies including more effective forecasting and procurement. In addition, Smorgon wants to transform it to use mine the data and aggressively use analytics to find and fund insightful areas for future growth, and most importantly, become more customer-centric in its many strategies. Taken together these five core challenges must be met for Smorgon to accomplish the strategic objective of transforming their it organization from being cost-based to being strategically active in the core parts of its company's business.

Brief description of organization

Smorgon Steel (SSX) is one of the leading providers of steel in Australia, and has grown steadily through acquisitions and an emphasis on building out its distribution business. It has a market capitalization value of approximately $1.3B on the Australian stock exchange and operates in 9 countries. The company relies on 3 dominant business platforms including metal recycling in Australia and Asia, Steel products in Australia, the U.S.A. And Asia, and Metal Distribution in Australia. As of the company's latest financial statements there are 5,800 employees globally. The latest financial figures provided in Table 1, Reported Financial Results are for the most recent analyst briefing held August 23, 2006.

The company was founded in 1981, and in 1983 initiated its first mini-mill for steel manufacturing in Laverton, Victoria. The company's use of electric arc furnace technology in steel production was the first of its kind in Australia.

Smorgon Steel went public in February 1999 on the Australian Stock Exchange following the acquisition of Australian National Industries (ANI). With that single acquisition, Smorgon doubled in size and lead to a successful initial public offering and provided the company with funding for additional acquisitions through today, as the company is in discussions to Smorgon's ERP Systems: Descriptions and Analysis

Disparate in their structure and intended roles in Smorgon Steel, the five major ERP systems in use within the company today are described and analyzed here.

SAP R/3-4.6c ERP Instance

SAP AG's founder Dr. Hasso Plattner often remarked that SAP AG was born out of the need for better distributed order management systems through process manufacturing industries. The result of this vision that was the impetus for the creation of SAP AG was an order management system that rivaled IBM's at the time, the company for which Hasso worked prior to starting SAP. SAP R/3-4.6c is the culmination of Dr. Plattner's vision for unifying all critical components into a single platform that could in turn be used for creating portal views to distributors, dealers, and resellers. R/3-4.6c was the first revision of any ERP system from SAP to also separate Web Application Server logic from SAP R/3 core technologies. In short, SAP R/3-4.6c is ideal for process goods manufacturers who rely on distribution channels as core parts of their value chains.

JD Edwards ERP Instance

Having since been acquired by PeopleSoft in 2003 and with PeopleSoft in turn being acquired by Oracle in late 2004 and being finalized in early 2005, the fate of support for JD Edwards applications is a huge unknown for over 40,000 of its customers. JD Edwards' leadership position in small and medium manufacturing is what attracted PeopleSoft in the first place, as the latter company had a solid base in human resources, accounting and CRM, yet lacked depth in the markets where JD Edwards excelled. Despite efforts by Oracle to assuage JD Edwards customers the reality is that Larry Ellison, CEO of Oracle, acquired PeopleSoft and JD Edwards to migrate them to the service-oriented architecture called Fusion, and has not completed any updates to either PeopleSoft or JD Edwards ERP systems since acquiring them. Clearly Smorgon Steel needs to quit paying for this ERP system's maintenance and find a solution to getting it discontinued and uninstalled as no major updates will be provided.

Symix ERP Instance

Seradex Manufacturing Software, like JD Edwards, found initial success selling into small and medium-sized manufacturers, especially in the fabricated products industry. Seradex is built entirely on the Microsoft platform, and as a result is requires WebMethods adapters and connectors to integrate even the most fundamental of data with the SAP R/3-4.6c instance that is currently running on the HP-UX operating system, using an Oracle 9(i) database specifically for the data warehouse. Symix ERP is comprised of a series of module suites. These include Front Office ERP, Accounting ERP, Core ERP Modules including System Manager and Bill of Materials. In addition Seradex has added in Management Control ERP modules and a core set of Manufacturing ERP Modules that Smorgon finds useful for supply chain management and Lean ERP manufacturing. Despite the breadth of modules that Seradex provides with the Symix ERP system however the many challenges of integrating data between Microsoft operating systems, databases to SAP R/3 field-level integration (which is among the most challenging in enterprise software) and Oracle 9 database support makes Symix a candidate for consolidation as well. SAP's Supply Chain Module on MySAP Suite that is the follow-on to R/3-4.6c for example can perform all the same functions of Symix yet can be negotiated as a bundle-in with SAP for consolidating ERP instances.

Progress ERP (homegrown) Instance

Smorgon Steel also has created its own in-house ERP system called Progress. Virtually any company with sales over $100M globally has at one time or another had to create their own ERP system primarily to track orders, coordinate and synchronize pricing, and manage bills of materials that in drive manufacturing on the production floor. Today Smorgon Steel is using WebMethods to integrate only at the data transaction level with Progress. While homegrown ERP systems over time are consolidated and their master data management functions are transitioned into a larger system of record, the majority of these types of systems are transformed into front-end systems for procurement and purchasing. It is conceivable that for Smorgon to be successful in its continued management of suppliers and buyers and continually manage strategic sourcing and procurement, the key functions of Progress will be transformed into a portal-based series of applications.

Creative Software EasyPay Enterprise Instance

Smorgon's Shared Business Services consolidate accounting, finance, human resources, and other core functions which the Recycling, Reinforcing, and Smorgon Metals Distribution divisions rely on for support. The company has chosen to make a substantial investment in the Easy Pay Enterprise (EPE) platform that acts as an Enterprise Application Integration (EAI) layer that serves to integrate the many processes areas where accounting and human resources are required to complete internal tasks. EPE is actually an integration layer suite of applications that is tailored only to shared common corporate functions. To date, Smorgon has found this a useful integration suite for their Shared Business Services architecture. Batch-oriented integration of key system updates and financials from operations must be consolidated, analyzed and stored on the SAP R/3 instance first. The integration between EPE and the SAP R/3 instance is not considered reliable due to the strict formatting and naming convention features SAP uses and that the EPE cannot exactly match on all transactions. As a result, Smorgon continues to spend heavily on consulting and integration projects between EPE and other systems, yet is not seeing the full impact of its investments as of yet. The inaccuracies in EPE vs. SAP system data are another cause for a declining level of credibility for higher it spending within Smorgon.

Analysis - Having began in steel manufacturing and progressed into Australia's largest distributor of steel products, Smorgon today find itself with an it architecture including ERP system strategies that are more suited for manufacturing than distribution. The strategies of the company have moved on, yet the ERP systems are stuck in the manufacturing past. From a strategic perspective this is slowing the company down from better serving its customers. Excellent evidence of this transition of Smorgon from being manufacturing to distribution centric is in the decision of senior management and the board of directors to place their largest ERP instance, an SAP R/3-4.6c installation, within the Smorgon Distribution Division. The fact that both the Recycling and Reinforcing Divisions also have legacy ERP systems installed, some with little integration beyond basic transaction reporting using WebMethods adapters and connectors that may or may not scale for the transaction traffic involved in each division, and one can see how limited the it infrastructure is today. What is needed is a re-architecting of it investments including the many disparate and sporadically connected ERP systems into a demand-driven network that better serves, suppliers, buyers, customer and gives Smorgon's management team insights into how to excel on the five dimensions defined in the introduction of this case study.

Transforming Smorgon's it Strategy

Smorgon's ERP strategies need to be revolutionized, and further than that, it needs to be transformed from a disparate set of high maintenance applications into an architecture that propels the company to its strategic objectives. Figure 1 is a graphical representation of Smorgon Steel's product flow originally presented in June 2006 by Ray Horsburgh, Managing Director & CEO Smorgon Steel Group Ltd.

Figure 1: Smorgon Steels' Product Flow and Value Chain

Several key insights emerge after an analysis of this product flow. First, Smorgon is high dependent on its suppliers, and the coordination with its supply chain partners, including buyers and suppliers is absolutely essential for the company to achieve its inventory turns targets, a key performance indicator Smorgon focuses on. Second, synchronizing with customers both those through distribution and those purchasing directly, is another critical area of their business model. The role of forecasting and sales analysis applications and tools are used for providing demand visibility for Smorgon to have enough time to react to changes in demand. Third, the company actively uses business trends syndicated research and industry research to anticipate changes in demand over time. Fourth, the role of CRM systems is in providing a 360-degree view of the customer and making progress towards the strategic priority of becoming more customer-focused and increasing market share. Fifth and most critical is the reliance the company places on analytics.

Measuring Business Strategy and ERP Performance with Key Metrics

These are the measures of success or failure the company uses relative to its business goals and they are listed below. Smorgon's it department tracks the following key performance indicators regularly and they are considered the measures of value that the ERP systems in the company deliver. It must be noted that each specific ERP system of the company will report only on its own activity, the consolidation of all activity is necessary to see the truly strategic view of the company. This is a critical area for future improvement, as these metrics in essence only measure the effectiveness of Smorgon's business that they report on:

Inventory Turns - Defines the speed at which 60,000 different products that comprise the Smorgon Steel product suite turn in a given time period. Typically inventory turns are measured monthly.

Cycle Time - the time it takes to complete an order. As the financial statements and the UBS Presentation presented in July, 2006 show, Smorgon is seeing specialized and customized products become one of the fastest growing parts of their business. This translates into the need for more efficient use of Business Process Management (BPM) to ensure higher rates of accuracy and reliability in meeting orders.

DPMO (Defects Per Million Opportunities) - a well-known supply chain metrics, the DPMO originated with Six Sigma process techniques and refers to the number of defects per million in any given production run.

Fill Rate - the rate at which customers' orders are filled and then delivered via the distribution channels Smorgon relies on. This is a key performance metric as it relates to the efficiency of Smorgon in managing and having visibility throughout its supply chain.

Back orders - the number of orders by product that could not be immediately fulfilled and needed to be scheduled for production later in the financial period. This often occurs due to stock outs, rejected lots of goods, and lack of visibility throughout the supply chain. Minimizing backorders is critical for driving down operating expenses, and as a result Smorgon invested heavily in Manugistics supply chain planning software. To date due to lack of integration however with ERP systems, the results have been mixed.

Demand Forecast Accuracy - as can be seen from Figure 1, the essence of the Smorgon Steel product flow is based on getting accurate demand forecasts from both direct and distribution or indirect customers. In the re-definition of the Smorgon it architecture to make it more focused on the needs of the business, the need to become more demand-driven and demand sensing is obvious.

In addition the company tracks the customer satisfaction, all the key financial metrics and publishes them as they are publicly-traded company, performance of suppliers against their requirements, supply chain management costs, and logistics performance.

Smorgon's Approach to Evaluating ERP Contribution to Strategies

Today Smorgon relies on the series of metrics as defined, yet for it to align more closely to, and become a greater contributor of the success of strategic objectives, there are major changes needed. With efficiency of operations and profitability being the two most watched series of metrics the company uses, it's clear that much more could be done in evaluating the contribution of their ERP systems. What's needed next isn't an entire series of analytics with real-time dashboards, but a rejuvenation of the role of ERP systems in the company overall. The company needs to mobilize them to become more focused on the supply chain nuances that affect their business, and in turn they must also focus on the demand-driven aspect of their product flow. As the total value chain of Smorgon is one marked by high velocity, the company needs to re-architect its processes to be truly demand driven. AMR Research originated the term Demand-Driven Supply Network and through a series of studies of the world's top-performing supply chains, learned that a maturity model emerged and demand network optimization was possible. Figure 2 shows the four layers of the DDSN Maturity Model from both a process and information capability stack perspective. From reacting to demand through orchestrating it, there is a corresponding progression of integration and the ability to shape demand. This is exactly what the ERP systems within Smorgon must do for the company to be competitive in the future.

Figure 2: AMR Research's Demand Driven Network Optimization Model

Strategic Use of ERP

As Smorgon Steel is about to be acquired by OneSteel as of this writing (October, 2006) putting the strategic use of ERP and the disparate structure of these systems into an urgent status for both companies. Smorgon and OneSteel will have nine months to get these systems integrated and working with each other to ensure no downtime for either business. Nine months is the typical amount of time required for full ERP system integration and about how long successful mergers take to switch over to a new single system of record.

In light of the merger in process, the strategic use of ERP needs to focus on the following series of priorities. First, there is the need for a much greater focus on Master Data Management (MDM) and the creation of a single version of the truth. Master Data Management frameworks are proving that Master Data Management deserves to be a major business initiative that looks to define the synchronization of data elements and structured content that can be quickly accessed to support sales and support strategies. Clearly Smorgon is missing out in many opportunities due to the lack of Master Data Management.

Second, the use of analytics across the divisions of Smorgon needs to be done through the development of an analytics layer that can scale across all applicable business units. The entire aspect of analytics in fact needs a strategic plan within Smorgon, and to that end the company needs to consider a strategy around enterprise manufacturing intelligence (EMI) which is experiencing a strategic resurgence due to the distributed nature of manufacturing globally. The consensus in this research is that multi-site visibility is critical for the future of manufacturing analytics, and that vendors are already focusing on how to turn this in their own competitive advantages in this segment.

In addition to supply chain planning systems integration and real-time analytics, it is clear from Smorgon's business model that there is a strong need for the ERP systems to have customer-facing components included within them. The consolidation of ERP instances to the SAP platform will help in this regard as MySAP portal technologies will make the transition to customer-facing applications more easily achieved.

Future Direction of ERP

While Smorgon does not have a specific business case in place for the future of their ERP systems, the need for managing the change individual contributors will need to make on their jobs is critical. ERP consolidations often fail due to a lack of change management being planned for, including the re-defining of the systems' processes and characteristics to match what the user specifically needs. This is a core part of any future direction for Smorgon that cannot be ignored.

In addition, the following initiatives form the roadmap for Smorgon Steels; future ERP direction: consolidating ERP to produce a single source of the truth using Master Data Management, enabling automated business intelligence for decision support / performance feedback, integrated strategies in place with PLC / MES systems, and simplifying automated processes using RF, scanning, barcodes, and workflow. In addition there is the urgent need to integrate with B2B systems for real-time forecasting, pricing and service data, and create a world-class extended supply chain planning system. The need for creating a private trading exchange through B2B e-business integration with key suppliers and customers and the urgent requirement of creating real time enterprise information is also a critical area for growth within the next four years. Finally the need for more efficient management of product, customer, branch profitability information is critical.